What If You Focused on Your Portfolio Instead of Inflation?

Economic fluctuations are a normal part of the cycle, and inflation is a persistent factor in any economy. This is especially noticeable during periods of transition, like when a new administration takes office. One of the most effective strategies for potentially weathering inflationary periods is staying invested. While you might not “feel” the growth of your investments in the same way you feel the pinch at the grocery store, it’s crucial to remember that your portfolio is working for you, even during times of uncertainty. 

What is Inflation, and Why Does it Happen? 

Inflation is the rate at which the general level of prices for goods and services is rising, and therefore, purchasing power is falling. Essentially, each dollar buys less than it did before. Several factors can contribute to inflation, including increased demand, supply chain disruptions, and government policies. It’s a complex issue, and while governments try to manage it, some level of inflation is generally considered unavoidable in a healthy economy. 

A Look at Historical Inflation 

U.S. inflation rates have generally remained low and stable since the 1980s. However, the economic impact of the COVID-19 pandemic led to a significant spike in inflation during 2021 and 2022. To illustrate this trend, let’s examine the year-end inflation rates for recent years: (1) 

• 2021: 7.0% 
• 2022: 6.5% 
• 2023: 3.4% 
• 2024: 2.9% 

The Disconnect: Prices Increase vs. Investments 

The reason you “feel” inflation so acutely at the grocery store but not in your investment portfolio is a matter of perspective. You buy groceries regularly, so price increases are immediately apparent. However, your investments are (hopefully) designed for long-term growth. While the value of your portfolio might fluctuate, the aim is for it to outpace inflation over time. 

Think of it like this: 

• Groceries: You see the price of milk go up by $0.20 and feel the immediate impact on your wallet. 
• Investments: Your portfolio might grow by several percentage points in a year, which offsets the inflationary impact and even provides real returns, but you are not experiencing the daily variation of that growth. You only experience the change occasionally, often only through a quarterly statement. 

How Investments Help Combat Inflation 

The key to combating inflation is to have your money working for you. Historically, various asset classes, like stocks, bonds, and real estate, have provided returns that, over the long term, have outpaced inflation. This means that while the cost of goods and services is rising, your investments are growing at a faster rate, preserving and even increasing your purchasing power. 

Staying the Course 

During periods of economic uncertainty, including times of new administration and potentially higher inflation, it’s crucial to stay focused on your long-term investment strategy. Trying to time the market is extremely difficult and can often lead to missed opportunities. By staying invested, you give your portfolio the chance to weather the storm and benefit from the eventual recovery and growth. 

Source: 

(1) Srinivasan, Hiranmayi. “Historical U.S. Inflation Rate by Year: 1929 to 2025.” Investopedia, Dotdash Meredith, 2 Feb. 2025, www.investopedia.com/inflation-rate-by-year-7253832  

This information is being provided only as a general source of information and is not intended to be the primary basis for investment decisions. It should not be construed as advice designed to meet the particular needs of an individual situation. Please seek the guidance of a financial professional regarding your particular financial concerns. Consult with your tax advisor or attorney regarding specific tax issues. Diversification does not guarantee profit nor is it guaranteed to protect assets. Investing involves risk, including possible loss of principal. No investment strategy can ensure financial success or protect against losses. Before investing, please consider your investment objectives and risk tolerance and how they correspond to the expenses, charges, and risks (including the possible loss of principal) of the product you are purchasing.